A truly global currency?

by Prof. Dr. Martin Hellmich*

Some analysts are warning that the USD is in danger of collapse because of the exploding U.S. government debt, the horrific US trade deficit and the new round of quantitative easing.

Others are warning that the EUR is in danger because of the serious sovereign debt crisis that is affecting Greece, Portugal, Ireland, Italy, Belgium and Spain.

The euro crisis will be with us for many years as the underlying causes, such as southern Europe’s lack of competitiveness which cannot be remedied overnight. The PIIGS states face years of low growth, severe curbs on public spending and social unrest.

The EUs governments need to agree on major reforms to Eurozone governance like stricter budgetary discipline, more mutual surveillance of economic policies and a mechanism for dealing with governments that need to restructure debt. Otherwise the chances of a default by one or more euro zone countries are very high.

This could be followed by a domino effect on other countries and even Germany, France and the UK would end up injecting capital and liquidity into their banks to ensure solvency.

Concerning the Dollar (USD), China and Russia already announced that instead of using USD to trade with each other they will now using their own national currencies. The fact that the USD has been the primary reserve currency of the world for decades has given the United States a tremendous amount of economic power.

Many countries have been heavily investing in dollar-denominated assets and now they are upset that those investments are going to be devalued.

So what happens if the USD and the EUR both collapse?

Creates a new financial order emerging from the ashes of a simultaneous collapse of the USD and the EUR a truly global currency? Or would the nations going back to use dozens of different national currencies?

With our knowledge today it is hard to decide which scenario will become true or is even the most probable. But we cannot deny that we have the severe part of a fundamental currency crisis in front of us and if the USD and/or the EUR collapse the world will certainly never be the same ever after.

* Martin Hellmich ist Managing Director der Brokerage Firma Cantor Fitzgerald Europe in London Fakultätsmitglied des Lorange Institute of Business sowie der Frankfurt School of Manangment and Finance.

Am Lorange Institute leitetet er das Module Wealth Management – Understanding and Hedging Currencies, Interest Rates and Commodities.


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